UBS Economics-China Economic Perspectives _Home Destocking Debate and Prop...-110039788

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ab



China Economic Perspectives

Home Destocking Debate and Property Forecast

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

China’s property activities have not bottomed since the unprecedented sharp downturn

in 2021. The decline in urban housing prices has accelerated since H2 2023 amid

elevated inventory pressure, weighing on household home purchase intention,

consumption confidence and local government finances. China has eased property

policies since end-2022 and rolled out coordinated easing measures in mid-May 2024.

However, traditional easing measures have had a limited impact, as supply-demand

fundamentals have changed notably and property policy easing has been piecemeal. In

particular, the progress of property inventory purchase has been slow so far.

!

We use 'available for sale but unsold' residential projects as an indicator of inventory

levels. As of July 2024, this figure was estimated at 19mn units, including 3.8mn units

'completed but unsold' and another 15.1mn units 'uncompleted but available for pre-

sales' homes. Both our top-down estimate and bottom-up data for 80 major cities show

the seasonally adjusted inventory to sales ratio has jumped notably to 29-30 months

lately, mainly on sharply lower property sales. We think the destocking priority should

focus on higher-tier cities, and estimate the total destocking cost required to normalise

the inventory to sales ratio in 80 major cities to 13-14 months at around Rmb3trn.

"#!

There is a substantial gap between the market housing price and social housing price (or

cost-based price cap), the latter significantly related to the proposed inventory purchase

price in many cities. In addition, the PBC's relending facility faces a variety of

bottlenecks, including high interest cost, short duration and small funding size. The price

gap and these bottlenecks make the current destocking programme less feasible and

more difficult to implement. We think the PBC needs to expand the scale, lower the

interest rate, and extend the duration of its social housing relending. An aggressive

option could be using special CGB, special LGB or policy banks bonds to buy inventory.

##!"!

We think China may need to implement much stronger property policy support to

stabilize the housing market, such as establishing a much larger scale destocking

program (with low-cost fundings), more aggressive mortgage rate cuts, more credit

support to developers, and government-coordinated property debt restructuring.

Nevertheless, our baseline forecast assumes additional modest property support,

including further cuts in mortgage rates and the downpayment requirement, expansion

of whitelist loans, and stronger support of developers’ financing. We also expect China

to raise the size of effective funding support for destocking to Rmb1.5-2trn, which could

contribute 1.2-1.7mn units of inventory destocking in higher-tier cities.

$%""

Our baseline forecasts a continued but 'less bad' property downturn in 2025E compared

with 2024E, with property sales, new starts and investment falling another 5-10%, 10-

15% and 5-10%, respectively, all weaker than our previous projections. Overall

residential sale volume may fall further in 2026E with lingering inventory pressure. We

think bigger policy actions are needed but may only be triggered by much deeper

property downturn and a significant external shock such as a 60% US tariff hike.

This report has been prepared by UBS Securities Asia Limited. &'() *)+,+*)+-& &. /0+. .+(*-(0(1

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#

China

&K

Economist

ning.zhang@ubs.com

+852-2971 8135

)

Economist

wang.tao@ubs.com

+852-2971 7525

*#L 28 August 2024 ab 2



L #" #$ J Since

2021, China has experienced the sharpest property downturn in history. Overall

property sales volume declined by 51% in Q2 2024 from H1 2021, while new starts have

contracted by a much steeper 69% from H220, and real estate development investment

has fallen by 34% from H2 2020. That said, even after such a sharp decline and recent

acceleration in property policy easing, especially those announced in mid-May (see more

details), property activities have not bottomed. Overall property sales, new starts and

investment in July 2024 all continued to register deep YoY decline of 15%, 20% and

11%, respectively, with their seasonally adjusted absolute levels all below Q2 average

(see July data comment). High frequency data also shows that new residential sales in 30

major cities only saw a short-lived rebound in late June and early July, but slid again

afterwards, recording a deeper contraction of over 20% YoY in August (vs a 16% YoY

decline in July, see UBS China Activity Tracker).

+#"*M#"J Based on

China’s Input-Output Table, we estimate that the property sector accounted for more

than 26% of China’s GDP around 2020, including its direct impact (real estate service

and property construction) and spillover effects via supply chain links (see more

discussion). With the sharp property downturn since 2021, we estimate that the

property sector's importance to GDP may fall to around 20-21% in 2024E. Moreover,

we estimate that the contribution of the property sector to GDP growth dropped sharply

from 3.6ppt per year during 2001-10 and 1.5ppt per year during 2011-2020, to a

significant drag of more than 3.5ppt in 2022 and 1.5-2.0ppt in 2023. Given the property

downturn has deepened so far this year, we think this drag may increase to more than

2.5ppt in 2024. We think this remains the main headwind to China’s GDP growth.

,HNL

"H

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

2,400

2,600

2012 2014 2016 2018 2020 2022 2024

New starts

Property sales

Floor space (mn sqm, sa, 3mma, annualized)

Source: CEIC, UBS estimates

,NLO.L



-4

-2

2000 2005 2010 2015 2020

Overall contribution of

property sector

GDP growth contribution (ppt)

Source: CEIC, NBS, UBS estimates

0       JJJ The fall in China’s urban

housing prices has been more modest than the residential sales volume contraction. The

official 70-city average new residential housing price declined by only 8% from its peak

level in Q3 2021 to July 2024, while secondary housing prices dropped a bit more, by

14% from the peak. Official data also shows housing prices have declined by less in tier

1-2 cities than in tier 3-4 cities, given 'less bad' fundamental support for the former. That

said, market data indicates the decline in housing prices has been much deeper, as the

average secondary housing price of six mega cities (four tier-1 cities, Tianjin and

Chengdu) has corrected 27% from its peak, much steeper than the 12% decline shown

in official statistics. In particular, the sequential decline of housing prices in most of

Chinese cities has been accelerating since H2 2023, reflecting mounting pressure from

subdued market sentiment and elevated home inventory. For instance, 70-city average

secondary housing prices declined by only 4% during 2022 and H1 2023, but dropped

more notably by 9% during H2 2023 and YTD 2024.

*#L 28 August 2024 ab 3

P##"J Weaker

property activities directly translate into weaker employment and household income

growth, and lead to softer sales of home appliances, furniture and related goods.

Moreover, we estimate that around 60% of China’s household wealth is in property, and

falling property prices have weighed on household wealth and consumer confidence

significantly, which has been a major drag on China’s post-pandemic consumption

recovery. In addition, the continued property downturn and housing price decline have

also depressed local government land sales revenue from Rmb8.5trn in 2021 to

Rmb5.8trn in 2023, with another 22% YoY decline posted in Jan-Jul 2024. Local

government financing vehicles (LGFVs) are facing balance sheet problems as well, as

they relied on property and land as collateral and/or revenue. That said, owing to a high

downpayment requirement and lack of home equity loans or mortgage refinancing,

China’s homeowners’ leverage and loan-to-value (LTV) ratio is low (see UBS China

housing survey). This gives homeowners in China more 'holding power' on their

property than those in other countries, with less risk of foreclosures and fire sales.

,IN-""Q$

HR"#!

115

135

155

175

195

215

235

11 12 13 14 15 16 17 18 19 20 21 22 23 24

Tier 1 cities average

Tier 2 cities average

Tier 3&4 cities average

Index of new commodity residential price (Jan 2011=100)

Source: CEIC, UBS estimates

,N  *  0(

S

100

105

-10 -9 -8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3 4 5 6 7 8 9 10

China (Centaline 6-city avg, Peak=Q2 2021)

China (New Residential, Peak=Q3 2021)

China (Secondary Residential, Peak=Q3 2021)

US (Case-Shiller, Peak=Q3 2006)

Japan (Residential, Peak=Q1 1991)

Japan (Commercial, Peak=Q3 1991)

Peak level = 100

Housing price index (peak level = 100)

Year 0 is the peak year

Source: CEIC, Haver, Wind, UBS estimates

*#!

*#$TJ China has eased

property policies since end-2022, including cutting the minimum downpayment

requirement and mortgage rates on a differentiated basis, relaxing home purchase

restrictions, rolling out a whitelist scheme to support construction of stalled projects.

Given the continued sharp property downturn in early 2024, the government

announced further coordinated property easing measures on 17 May (see Figure 5 and

our report), indicating the top leadership’s determination to stabilise the housing

market. Many high-tier cities, including all four tier-1 cities (see Figure 6), rolled out

follow-up easing measures. There are three key pillars to ongoing property policy easing:

boosting home purchase demand, supporting home delivery and developer financing,

and destocking property inventory.

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abChinaEconomicPerspectivesHomeDestockingDebateandPropertyForecastDowngradeChina’spropertyactivitieshavenotbottomedsincetheunprecedentedsharpdownturnin2021.ThedeclineinurbanhousingpriceshasacceleratedsinceH22023...

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